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Sunday 10 August 2008
Hedge funds brace for more heat after record losses
Hedge funds are braced for more dire performance data after sharp reversals in commodities and financials last month pushed some funds to record losses - making the goal of positive returns for the year even harder to reach.
Hedge funds brace for more heat after record losses
Laurence Fletcher Aug 10, 2008
Hedge funds are braced for more dire performance data after sharp reversals in commodities and financials last month pushed some funds to record losses - making the goal of positive returns for the year even harder to reach.
Like the market swing in March following the bailout of Bear Stearns, the spike in volatility in July caught many funds by surprise as two of their favourite bets - long commodities and short financials - simultaneously unwound.
Hedge funds can in theory make money during periods of high volatility, but last month’s losses show how even skilled market operators can be caught out by sudden market changes.
Hedge Fund Research’s HFRI Monthly index was down 2.35 per cent in July. Other index providers are set to report similarly poor numbers this week. “It was a properly difficult month,” said BlackRock fund manager Mark Lyttleton.
“If you’re highly leveraged, you’re going to be losing a lot of money very quickly.
“There’s one or two hedge funds that I look at [that] I would imagine at certain points of the month were down 10 to 15 per cent, and one of them, which is a good one, was down 7 [per cent] in a month, which is the worst month they’ve ever had.”
Funds that owned soaring commodities and shorted battered financials in the expectation of further price falls have profited in recent years.
John Paulson, for instance, the top-earning manager last year with US$3.7 billion, has been short financials. But the suddenness of the drop in commodities and recovery in financials last month resulted in heavy losses for many funds that were betting against such moves.
During July, the FTSE All Share Banks index jumped 5.8 per cent, including three days of gains or more than 6 per cent. Large-caps such as Royal Bank of Scotland and Barclays twice jumped more than 10 per cent in a day. In contrast, the FTSE All Share Mining index fell 13.1 per cent, including five days when it fell by more than 4 per cent.
“We suspect it will have been a very difficult month for the hedge-fund industry,” said Cazenove fund manager Tim Russell in a note to investors. “There was significant mean reversion in sector performance.”
The US$2.6 trillion hedge-fund industry, which is meant to be able to make money in all market conditions, could be on course for only its second calendar year of negative performance since 1990 - a significant result in what has until recently been a red-hot asset class.
Hedge Fund Research’s HFRI index is down 3.54 per cent for the first seven months of the year. But not everyone is panicking. “It’s only one month, so let’s not get carried away by this,” said Mr Lyttleton.
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Hedge funds brace for more heat after record losses
Laurence Fletcher
Aug 10, 2008
Hedge funds are braced for more dire performance data after sharp reversals in commodities and financials last month pushed some funds to record losses - making the goal of positive returns for the year even harder to reach.
Like the market swing in March following the bailout of Bear Stearns, the spike in volatility in July caught many funds by surprise as two of their favourite bets - long commodities and short financials - simultaneously unwound.
Hedge funds can in theory make money during periods of high volatility, but last month’s losses show how even skilled market operators can be caught out by sudden market changes.
Hedge Fund Research’s HFRI Monthly index was down 2.35 per cent in July. Other index providers are set to report similarly poor numbers this week. “It was a properly difficult month,” said BlackRock fund manager Mark Lyttleton.
“If you’re highly leveraged, you’re going to be losing a lot of money very quickly.
“There’s one or two hedge funds that I look at [that] I would imagine at certain points of the month were down 10 to 15 per cent, and one of them, which is a good one, was down 7 [per cent] in a month, which is the worst month they’ve ever had.”
Funds that owned soaring commodities and shorted battered financials in the expectation of further price falls have profited in recent years.
John Paulson, for instance, the top-earning manager last year with US$3.7 billion, has been short financials. But the suddenness of the drop in commodities and recovery in financials last month resulted in heavy losses for many funds that were betting against such moves.
During July, the FTSE All Share Banks index jumped 5.8 per cent, including three days of gains or more than 6 per cent. Large-caps such as Royal Bank of Scotland and Barclays twice jumped more than 10 per cent in a day. In contrast, the FTSE All Share Mining index fell 13.1 per cent, including five days when it fell by more than 4 per cent.
“We suspect it will have been a very difficult month for the hedge-fund industry,” said Cazenove fund manager Tim Russell in a note to investors. “There was significant mean reversion in sector performance.”
The US$2.6 trillion hedge-fund industry, which is meant to be able to make money in all market conditions, could be on course for only its second calendar year of negative performance since 1990 - a significant result in what has until recently been a red-hot asset class.
Hedge Fund Research’s HFRI index is down 3.54 per cent for the first seven months of the year. But not everyone is panicking. “It’s only one month, so let’s not get carried away by this,” said Mr Lyttleton.
Reuters
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